The Far More Important 'Election' Part 2: China's Market Implications

Tyler Durden's picture

Having made clear in Part 1 the various policy leanings, uncertainty, and potential reform headlines, we delve a little deeper into the specifics of what the systemic and idiosyncratic implications might be. In two simple tables, Goldman lays out the top-down asset-class perspectives as 'new' China addresses its systemic issues and then looks at how China's equities (and by implication global equity indices) can meaningfully re-rate with a background of economic sustainability concerns as reforms impact various sectors more or less. As Goldman concludes: "Cyclical adjustments can help to restore confidence, but investors will likely be unwilling to meaningfully re-rate the market until more concrete progress is made on the reform front…but reforms may not be good for all sectors."

Via Goldman Sachs:


The leadership elections/transitions in both the United States and China have again drawn attention to the long-established practice of Chinese currency management through the setting of a daily “fix” of the $/CNY by the People’s Bank of China (PBOC), around which the $/CNY is allowed to fluctuate within a predetermined band. However, despite the continuation of this practice, several small steps have been taken to increase the flexibility of the CNY. Under the new leadership, it is more important to watch for further CNY reform progress than to focus on the daily CNY fix.

This more market-determined push has lead to an increase in volatility...


Much of this increased volatility can be attributed to swings in “hot money” flows, or how much money has flowed into or out of the Yuan, reflecting the desire to hold CNY versus foreign currency assets. Since late 2011, hot money outflows dominated, owing to a general easing of CNY interbank interest rates that reduced the attractiveness of holding money in Yuan and, more importantly, rising concerns about China’s hard landing risk and Europe’s sovereign debt crisis. These outflows were likely a key driver in reducing appreciation pressure from an otherwise solid external balance over the past year, pushing onshore CNY to the weak side of its trading band.


More recently, major monetary easing initiatives by global central banks and better-than-expected activity data for China has helped lift market sentiment, particularly towards Chinese growth. As a result, net hot money outflows have appeared to stabilize in September and might even have reversed thereafter, consistent with onshore spot trading persistently at the strong side of its daily band. Looking ahead, while the “fix” is likely to remain largely determined by policy factors and China’s overall external balance with the rest of the world, money flows driven by market sentiment are expected to continue to influence how onshore CNY trades within its daily trading band.

Less appreciation pressure and increased two-way expectations for $/CNY bring fundamentals more closely aligned with increasing freedom of flows in and out of China. The steps taken in the last few years are likely to be broadened, both in size and coverage.




Investors have long been concerned about the rapid credit expansion in China since the 2008 global financial crisis, and the efficiency of the Chinese banking system in allocating credits, especially to the private sector and to small and medium-sized enterprises (SMEs). The new leadership will have to address these concerns, potentially sooner than later, in order to quell the growing discontent from the private sector, which will be key to China’s economic future.

[As we pointed out here, things look extremely bubble-like in our view]




Reforms - the key to growth sustainability

In spite of a long period of strong growth, China’s economic model is facing intense skepticism. Investors are increasingly worried about critical issues such as:

(1) economic rebalancing away from exports and investment;

(2) deregulation and moving towards market-oriented systems;

(3) wealth disparity reduction; and

(4) limiting State-Owned-Enterprise (SOE) dominance.

Many investors feel that the past few years have seen not only no forward reform progress on these fronts, but actually some setbacks.

Seven top priorities pave the way to a better future

Fortunately, hopes for reform are improving as the once in a decade leadership transition in 4Q12-1Q13 approaches. There are likely seven main areas of reform that will be most urgent and most directly relevant to key industries and markets according to the 12th five year plan and yearly State Council reform agendas. Reform progress may be easier for some of those reforms than others (which involve reallocations of existing interests, such as deregulation or restructuring).

  1. Pricing deregulation: moving away from price control towards market driven pricing; impacting areas like oil, commodities, IPPs, as well as services such as airlines. 
  2. Tax reforms: tax reduction for SMEs/private companies, shift from indirect to direct taxes such as resource tax, and property taxes. 
  3. Energy savings: stricter emission standards, lower energy consumption, subsidies for green products, etc.
  4. Social safety net and healthcare: enhancement of safety nets for the masses including efforts such as pension reform, social housing, hukou (household registration) reform, education reform, and healthcare reform.
  5. Financial sector deregulation: interest rate deregulation, liberalization of insurance investment areas, etc. 
  6. Financial sector innovation: deepening markets such as the corporate and municipal bond markets, new products. 
  7. Railway restructuring: breaking up the Ministry of Railways into several parts to separate regulation and operation and pave the way towards more market driven, sustainable organizations.



While structural reform in China is mainly domestic facing, there will be large knock-on effects for global equities and assets classes; though expectations are low...


Source: Goldman Sachs

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DoChenRollingBearing's picture

As long as they leave the bearing plants alone, I'm OK with whatever they decide...

CPL's picture

Susuki just filed chapter 11 on their auto division.  That's a fuck tonne of auto dealers going tits up tommorrow.


Alternatively the Susuki swift now can be had for scrap value.

Zer0head's picture

If there was any doubt that Bloomberg jumped the shark along with its host of hosts Tom Keene, their early morning co-host today was  Joe (marbles in his mouth) the Weasel from Business Insider.


markmotive's picture

Attention White Voters - Chris Rock has a message for you:

Mom jeans...hilarious!

valkir's picture

Asset class....,i missed the rest.How can watter be more expencive than gas in gas stations?I dont watch DOW to see what's going on,i watch the streets.Picture is not pritty.

AldoHux_IV's picture

Price and financial deregulation, and financial sector innovation could be the funniest things I've read today (and I've read a lot of bullshit).

Suffice it to say, with the way the markets and financial system are set up, that deregulation is a Harvard degree holding term for the transfer of control from one small set of people to another small set of people and let's just say that the second set of people will be doing "God's work" because academics and bankers know better than politicians and politicians surely know better than the free market.

/very sarcastic and /very tired of the bullshit



Urban Redneck's picture

Perhaps Goldman has saddled its horse to one of the small fish (crooks) in the establishment

Or perhaps they are having trouble translating the Chinese version of Kleptocracy for Dummies

Cabreado's picture

GS... China leaders... really?

Sociopaths analyzing Sociopaths is not useful, particularly when the endgame of the arrangement is in full play.
But I do appreciate the documentation.

Yen Cross's picture

Baltic dry slipping again.           Shanghai down 1.5%

q99x2's picture

As long as they prevent the US from controlling their access to oil reserves they will do great. Fuck You Bernanke.

buzzsaw99's picture

if only china would listen to the the squid, heh

i pity the fool. [/mr. t]

Inthemix96's picture

"Chinese citezenismship" is now not what it was when its wasnt.

"Chinese exceptionlasims" is nows coming to them forefronts of evolutionarys cyclisms.  Thisings the first modern steps of thems "chinese brilliances" to expect several storms on the home fronts but swingings back to reformatiy for all world to be seeing.

Just been on the horn here folks to AnAnonymouses, he told me so.


q99x2's picture

Goldman issues reports in its attempts to contol the world through financial terrorism. China should be the first to move to bitcoin as a national currency.

WhiteNight123129's picture

REad central banking mid august, check PoBC signing a contract with FICO, check the news from October 21st on ordering a think-tank paper. Goldman Sachs is bullshitting, China is moving toward a strong Yuan policy (yep, they will sacrifice the SOEs). They will not look for inflationary solution, they came to power because of hyperinflation in 1948 and almost got toppled with panic buying starting in 1987 with 14% inflation. Money is going to stay hard in China, that is your big surprise. Check the Shibor, check the 7 days repo, does look like significant losening to you?

China does not give a shit about the Cartel.


Shelby Moore III's picture

Stay hard? It has never been hard, they print Yuan like crazy to keep the peg and keep their negative profit margin industry running by enslaving their citizens with low international wages.

Shelby Moore III's picture

China = "Check is in the mail", "My dog ate my homework, so I xeroxed yours", "Red is the only (allowed) color, so it is also green", "everyone gets impregnated once in their life, because Red is the only color, because the dog ate my homework, because the check was in the mail, because...".

LawsofPhysics's picture

Sweet, another crack/credit addict country in the making.  Only this one is a communist/socialist state-run monster.  This should turn out well. < sarc off >